A stock is expected to pay a dividend of $0 50 at the end of the year (i. e., D1=$0.50), and it should continue to grow at a constant rate of 7% a year. If its required return is 12%, what is the stock’s expected price 4 years from today?

$13.1

Explanation:

The value of the stock at the end of the 4 years from now shall be determined through following mentioned formula:

Value of stock at year 4=D5/R-G

R=required rate of return=12%

G=growth rate in dividends=7%

D5=dividend at the end of year 5, which shall be calculated as follows:

D1=$0.50

D2=$0.50*1.07=$0.535

D3=$0.535*1.07=$0.572

D4=$0.572*1.07=$0.612

D5=$0.612*1.07=$0.655

Based on the above calculations, the value of stock at the end of year 4 is given as follows:

Value of stock at year 4=$0.655/12%-7%

                                       =$13.1

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